My Franchise Agreement is Expiring, Now What? (Part II of II)

Video Transcription

Another question regarding duration and expiration has to do with… Well, this is the… “Who owns a business at the end of the term in the franchise?” So I think I remember this one. He wanted to…the person was angry, he had been terminated, and rightly so. He had been terminated and said, “How can they simply take away my business without paying me the good will, what my business is worth?” I think it did state that the franchisor merely had to provide him with payment for certain of the tools and equipment in his shop. And the answer is, it’s an answer that most franchisees would never understand, they’re really not buying a business, what this is, you’re not buying the good will to a store as you would if you were putting together an independent business. There’s no residual value at the end of the franchise term. And unless you have a perpetual agreement where you will be in that spot forever, and ever, and ever, and the franchisor cannot boot you out, you really don’t have any, what I would call, “traditional good will”. I don’t agree with that, and I don’t agree that you can never, a good franchise lawyer, can never get that for a franchisee. But overall, a franchisee should never bank on being recognized as an owner. Although it’s a myth created by franchisors that franchisees are getting true independent ownership in a business. It’s one of the biggest lies of franchising in my mind.

Another question that, regarding this issue is, “Do post-term covenants not apply if there’s an expiration rather than a termination?” In other words, this person’s agreement expired, he wasn’t terminated. And he wanted to become and operate as an independent in that area that he had operated his franchise. And the argument, in the old days, use to be well, the post-term covenant that prevents him from operating as an independent would only be triggered by a termination. It’s a different word than “expiration”. And because the franchise agreements were not written that clearly, 10, 12 years ago, relative to the clarity with which they’re written now, there were some cases where you could get by with that and some judges would buy it, interpreting the contract, saying expiration’s different than termination, etc.

It’s come about that franchisors and their thousands of great lawyers, have plugged that hole in franchise agreements and dealership agreements, such that expirations are now treated similarly to terminations, with regard to triggering of post-term covenant not to compete, which makes it even more unfair on its face, because a franchisee has worked hard, not been terminated, done a great job, the franchisor’s not required in certain states to offer a renewal, and the franchisee is out. There’s no requirement of a renewal, no requirement of payment, and worse yet, the franchisee cannot go out and earn a living doing the business that he was for the previous 10 years. So the post-term covenant applying on top of a non-renewal is a deadly combination, and it does happen in certain states. Again, this is general advice. Not knowing the state, not knowing the court, not knowing the judge, not knowing if you’re in arbitration, all these things for a franchisee litigator are important in terms of giving you odds on your case.

The seventh question that we had from a franchisee during the last couple weeks, dealing with duration and expiration, it says, “Can my franchisor terminate me whenever it wants?” Well, your franchise legislation, and there’s new legislation in California, actually, does require that a termination occur only in the face of good cause, and then there’s different aspects of what is good cause. So a franchisor is limited regarding termination during the term, when we discussed how long the term would have to be earlier. During the term, the most often used cause is the word “good cause” or the term “good cause,” and that could mean…it usually focuses on what the franchisee is doing, his conduct. Did the franchisee meet its requirements, did the franchisee not pay its royalties, did the franchisee not properly represent the franchisor? There are a few states that have held that it wouldn’t include business operations of a franchisor. So if a franchisor wanted to stop distributing in a certain way and vertically integrate forward and begin to serve his customers directly himself or through company-owned outlets, that would not fit in the good cause concept, and it would be a violation of the statute. And then I believe there are a couple other states that are “franchise protection states”, but they’ve modified the term “good cause” to include legitimate business reasons of the franchisor. So the franchisee would get nailed in that case as well.

As you can see, the area of expiration, termination, non-renewal, is fairly complex in terms of the number of permutations you can have, depending on how the state law would interface with federal statutes, state statutes, state common law, and the intent of the parties, which is gonna be an overwhelming criterion as the court looks at the common law aspect of this. A good franchisee lawyer is used to juggling three or four different areas of the law, putting them together, integrating them, synthesizing them, and coming out with a percentage for you as to whether you can rely on getting a renewal at the time that it comes up in your contract.

However, the one thing I would caution you against is relying on a renewal provision that looks to you, as a layperson, as cut in stone. Probably is not, given the evolution of franchisee law and how things are interpreted. And I’d advise you to get a franchisee lawyer, take a look at it, do a quick consult, so you can plan ahead and not find yourself in court arguing from the poor viewpoint that, “Three months ago, your Honor, I was not renewed.” And the court is saying to you, “You shoulda come then.”

Please look us up online, www.goldlawgroup.com. Or give me a ring, Jeff Goldstein at 202-293-3947. Look forward to seeing you in the future. Thanks.

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